Fighting Back! Can I Counter Sue My Employee?

One of the first questions employers ask after being sued by a former employee is whether they can take legal action in return, especially when they believe the employee caused harm to the business. The answer is yes, but only under specific conditions that many employers misunderstand.

John Fagerholm, Managing Partner at DefendMyBiz, breaks down when a counterclaim is valid and when it can backfire.

The Scenario: Wage Claim vs Employee Misconduct

"A potential client emailed me telling me about a problem that he's having with a former employee," John explains, "and then he was asking me if he could counter-sue the employee that sued him."

The situation involved the following:

"The employee sued him for what he's saying are labor violations: overtime, missed meal breaks, missed 10-minute breaks. But then the employer told me that, when he left, the employee had embezzled a bunch of money. It was roughly about... basically, wrote a bunch of checks to himself."

This is a scenario many employers encounter: a wage claim filed by an employee who may have also caused financial harm to the business.

So what are the employer's options here?

Can You Counter-Sue an Employee in California?

Short answer: Yes, employers can file a counterclaim against an employee, but only if it is based on a valid, legally actionable claim such as fraud, theft, or embezzlement.

The key condition is that the counterclaim has to be based on something real and legally actionable. John draws a clear line: "You can't counter-sue them for being a bad employee. For example, if they just didn't do their job well and you paid them for it, you can't say, 'Hey, I wasted my money' or 'They didn't do what I paid them for, so I'm gonna sue them.' That you can't do."

Performance issues, poor work quality, general dissatisfaction with what you got for your money, none of that clears the bar. A counterclaim must be based on specific legal wrongdoing.

When a Counterclaim Is Legally Valid

In the embezzlement scenario John was asked about, the situation changes.

"If they've done something criminal, for example, like embezzlement, in this particular case, first of all, you should be reporting it to the police. But second, yes, you can counter sue for the damages, which is the dollar amount that they stole."

Criminal conduct that caused a quantifiable financial loss to the business is exactly the kind of claim that holds up. These claims are specific, documentable, and create a clear legal basis for a counterclaim.

How a Counterclaim Changes Negotiation Leverage

Even when the dollar amounts don't fully offset the employee's claim, a legitimate counter suit changes the dynamics of the negotiation.

"It gives you at least a little bit of leverage," John explains. "Because if you're just being sued and the California laws are pretty much against you, then you have something to negotiate with. That negotiation could potentially cause the damages that you have from the wrongdoing of the employee."

In California, employers defending wage-and-hour claims already operate in a legal environment that tilts toward the employee. A viable counterclaim doesn't level the playing field entirely, but it gives your defense team something to work with at the negotiating table.

If you're currently dealing with a wage or overtime claim alongside suspected employee misconduct, the wage and hour defense team at DefendMyBiz can help you assess both sides of that equation. For claims involving employee theft, fraud, or unfair competition, see our hybrid and non-FEHA claims defense page.

When a Counterclaim Backfires

John is equally direct about what not to do:

"Let me warn you, just to sue on a claim that you don't have, this creates additional legal risk. Because that's just gonna create a bunch of problems down the road that is gonna end up costing you more and potentially could put you in even more civil liability."

A counterclaim filed as a tactical move without a genuine legal basis backfires. It increases litigation complexity, can signal bad faith, and may create additional liability exposure. The leverage only works if the claim is legitimate.

Watch John's full breakdown below:

Get the Strategy Right From the Start

Employers can counter-sue employees in California, but only when there is clear legal wrongdoing such as fraud or theft. Unsupported counterclaims increase risk rather than reduce it.

The decision to file a counterclaim should be based on legal merit rather than reaction.

If you're dealing with a wage claim and potential employee misconduct, DefendMyBiz works with employers to evaluate whether a counterclaim strengthens or weakens your position. Schedule a free 15-minute consultation today.

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Disclaimer: The above content is for informational purposes only. This is not legal or tax advice. Laws, IRS guidance, and withholding requirements can change, and outcomes depend on specific facts. You are advised to contact a qualified attorney for any legal advice.